Do you create a partnership? A corporation? And what kind?
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When business takes a turn for the worse—the debts become unmanageable, say, or it’s hit with a punishing legal judgment—the outcome could be disastrous for your personal finances. Unless you’ve chosen a business structure to insulate you from such bad fortune.
The owners of limited liability companies, limited partnerships, and corporations are usually only liable up to the amount they invested in the business. Creditors and plaintiffs can’t go after the owners’ personal assets.
Which of these alternatives should you choose? One consideration is taxes: Whether they’re levied before or after profits are distributed to owners, and how selling the business might affect them. Another is the nature and number of the company’s owners.
Once you choose a structure, realize that switching it into another type is hard. You might be tempted to change if you believe that you’ll get a better tax benefit, but the tax code discourages such shifts.